The company is considering the purchase of machinery and equipment to set up a line to produce a combination washer-dryer. They have given you the following information to analyze the project on a 5-year timeline:

• Initial cash outlay is $150,000, no residual value.
• Sales price is expected to be $2,250 per unit, with $595 per unit in labor expense and $795 per unit in materials.
• Direct fixed costs are estimated to run $20,750 per month.
• Cost of capital is 8%, and the required rate of return is 10%.
• They will incur all operational costs in Year 1, though sales are expected to be 55% of break-even.
• Break-even (considering only direct fixed costs) is expected to occur in Year 2.
• Variable costs will increase 2% each year, starting in Year 3.
• Sales are estimated to grow by 10%, 15%, and 20% for years 3 - 5.

Then to calculate:

• The product’s contribution margin
• Break-even quantity
• NPV
• IRR

Finally:

• Explain how the project analyses do or do not support this decision.
• In either case, what are the factors that should have been considered in management’s decision?

Answer rating: 100% (QA)

Sale Price Per Unit 2250 Less Variable Expenses Labor expenses Per Unit 595 ... View the full answer